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Australia heads towards the 2025 election a little too relaxed about what's required to drive our economy. The challenges ahead mean it needs genuine reform. Australia heads towards a federal election campaign facing enormous economic challenges — and we're dangerously complacent because of decades of nearly uninterrupted economic growth. The nation's economy needs fundamental reform that will require tough choices, not band-aid solutions. Australia has the good fortune to have an economy that is strong and tax revenues remain elevated due in part to historically high terms of trade and employment. But there are major hurdles in the near future, including in the key areas of housing, immigration and international trade — with the federal budget sitting in the wings as a key risk. We need more homes Problems in housing, like other sectors, have emerged gradually. Home prices continue to rise in our capital cities and home ownership is out of reach for many Australians. Past governments have made only token efforts to address this, often by subsidising purchases by particular groups such as first home-buyers. Economic theory predicts this type of policy advantages one type of buyer over others while exacerbating the overall problem by pushing prices even higher. A reduction in home prices requires more housing to be built. As it stands, the two major parties have great aspirations to build homes, but little in the way of concrete federal policies on either side to support their stated goals. The immigration conundrum The second major challenge is immigration, which has surged after falling sharply during the pandemic. Immigrants contribute an enormous amount to Australia and are an important part of maintaining stable population growth at a time when the birth rate is historically low. However, concerns about house prices have motivated governments to dramatically reduce Australia's immigration intake in haphazard ways, especially the intake of international students. This has caused major budget challenges at universities, which need the revenue international students bring to fund research and educate Australian students. Neither major party has proposed constructive ways of replacing this revenue. Uncertain times in international trade International trade poses a major challenge heading into uncertain times. Australian trade relies heavily on China, where the economy has slowed due to a real estate crisis, demographic shifts and weaker global demand. This situation may worsen considerably soon, with US President Donald Trump apparently willing to wreak havoc with sudden and sharp changes in tariffs imposed on allies and competitors alike. His most-recent moves to put tariffs on aluminium and steel are early examples of moves that could affect Australia. All of this could lead to sharp reductions in demand for Australian goods and, ultimately, a weaker economy and less tax revenue to fund expenditure. Balancing the national books The federal budget itself poses risks. The fact the budget looks healthy is partly because factors such as the terms of trade, which are outside our control, are driving up tax revenues. This could change rapidly. Significant expenditure has also been hidden by pushing it off the government balance sheet or into the future. The National Disability Insurance Scheme (NDIS) continues to grow at an alarming rate, defying efforts to rein it in. Meanwhile, the Albanese government continues to promise large spending increases in childcare, higher education and other programs. That means Australia is seeing extraordinary growth in the share of economic activity driven by the non-market sector. And the current government aims to further increase its role in the economy through initiatives like its Future Made in Australia plan. Such direct government involvement is more likely to stifle innovation than to have a positive impact on Australia's stagnant productivity and persistently low real wage growth. Recent industrial relations reform is also likely to harm productivity, although it could increase nominal wages. This is especially the case for developments such as multi-employer bargaining. Inflation remains stubbornly high compared to other countries, sustained in part by this strong government demand. This means interest rates remain high and has likely also contributed to low real wage growth. Some efforts by the Albanese government — including major initiatives in competition policy — might be productive in the long run. Other initiatives, such as energy subsidies, are more likely to have prolonged the inflation problem. The need for real reform Addressing Australia's fundamental economic issues will take genuine reform. Housing supply could be increased and house prices lowered if the federal government gave states stronger incentives to reduce barriers to construction. Revenue could be raised at lower cost and with fewer distortions if governments were committed to serious tax reform. The major parties seem uninterested in this, with so far the only constructive proposals coming from the teals. Meaningfully curbing the growth of the NDIS would require harder decisions about who and what is funded, yet is possibly the most critical of all. Such economic reforms to bolster productivity are crucial if Australia is to maintain and improve its standard of living. Nobel Prize-winning American economist Paul Krugman said: "Productivity isn't everything, but in the long run, it's almost everything." Progress has been made in some areas, such as efforts to improve childcare access and encourage more secondary earners to enter the labour force. Unfortunately, the current aim appears limited to expanding access and moving closer to universal childcare, albeit not quite getting there. This is an appealing goal on the surface, but one which research says is not necessarily beneficial. By contrast, there has been very little engagement on the content and delivery of higher-quality early childhood education, which research indicates is highly beneficial if targeted at disadvantaged children. There have been positive developments in higher education policy, including changes to the indexation of HECS-HELP payments and an increase in the payment threshold. However, the backward-looking forgiveness of HECS-HELP loans will benefit relatively richer tertiary educated people at others' expense, while making little difference to the affordability of higher education for those entering the system. We won't solve the major economic issues we're facing in housing, immigration and international trade overnight. It will take fundamental reform to prepare the Australian economy for these and other challenges ahead. So beware of band-aid solutions as we head closer to the election. Dr Ashley Craig is a Senior Lecturer in economics, and a John Mitchell Research Fellow at the Australian National University. His research spans public economics and labour economics, with a particular focus on education, taxation and inequality. Originally published under Creative Commons by 360info™. Also Read | How India can navigate global trade shifts in Trump 2.0

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